MARKET WRAPS
Watch For:
EU PMI, PPI; Germany PMI, foreign trade; France PMI; Italy PMI, retail sales; UK PMI, Bank of England interest rate decision, official reserves; OECD CPI; trading updates from AXA, Solvay, BMW, Infineon, Merck, Lufthansa, adidas, Societe Generale, Veolia, Salvatore Ferragamo, Anheuser-Busch, Smith & Nephew, Evraz, Rolls-Royce, London Stock Exchange, ING, Alliance Trust
Opening Call:
Shares are poised for a mixed start in Europe on Thursday after the U.S. debt downgrade by Fitch, and in the run-up to the Bank of England's rate decision. In Asia, stock benchmarks were in the red; Treasury yields were mixed; the dollar was steady; oil rose on tight supply; while gold slipped.
Equities:
European shares could open mixed on Thursday amid concerns over the global economic outlook, following Fitch's U.S. debt downgrade.
Investors are also bracing for the BOE's rate decision, along with a raft of U.S. and European economic data due later in the day.
Fitch's decision created uneasiness among investors already concerned about the risks of a recession as a result of the Federal Reserve's monetary tightening, and whether this year's stock-market rally still has room to run given rising valuations.
"Markets will take some time to digest the news," said Ally Invest Securities. However, it doesn't expect the credit rating downgrade to cause the stock market much long-term damage. "We've seen this before," it said. "This alone won't be enough to put significant downward pressure on stocks."
Oanda said traders are using the surge in yields and some nervousness ahead of Apple and Amazon earnings as an opportunity to lock in profits. He says the next 48 hours, with July payrolls Friday, "might sway markets in thinking we might need to see more Fed tightening."
European manufacturing purchasing managers index numbers are expected later, along with U.S. non-manufacturing PMI and factory orders data.
Forex:
The dollar was steady, although analysts expect the currency to extend recent gains over the coming weeks due to the relative outperformance of the U.S. economy.
"With the U.S. economy holding up far better than that of the eurozone, the dollar continues to attract capital, despite shifting Fed[eral Reserve] expectations," Tickmill Group said.
Recent data suggest that the eurozone and U.K. economies look more fragile than the U.S., while monetary policy in Japan remains highly accommodative.
Analysts point to signs of a soft landing in the U.S. economy, coupled with the possibility that the Fed may still raise rates further even as the market prices only a very small chance of this.
Both the Fed and the ECB are thought to be at or near the peak of their rate-rising cycles, but both are data-dependent, with key data coming in until their respective next policy meetings in September.
"With traders now far less hawkish on the European Central Bank, the divergence in outlook between the Fed and the ECB has narrowed considerably, also helping drive capital back into the dollar," Tickmill said.
The decision by the Bank of England later in the day will be a key driver for the GBP/USD pair and any indication that BOE is considering a pause or nearing the end of its hiking cycle potentially translates to some downside risks for the pair, IG Research said.
Any breakdown of the 1.264 level may pave the way towards the 1.239 level next.
Bonds:
Treasury yields were mixed, as markets juggle the U.S. debt downgrade by Fitch and ADP's stronger-than-expected jobs data.
ADP reported net job creation last month at 324,000, versus consensus of 175,000.
The ADP data plus Friday's nonfarm payrolls report will feed into the Fed's calculations on whether to continue tightening monetary policy, although the ADP report is seen as having a poor record of foreshadowing the government's official employment report.
Markets still price in a September skip and rate cuts starting in the first half of 2024.
Fitch's downgrade "will likely not have an impact on U.S. government debt or markets broadly," said LPL Financial. "The U.S. remains the safe haven during times of market stress and the downgrade will likely not change that."
Energy:
Oil prices advanced in Asia amid supply tightness.
"Crude prices tried paring losses after the EIA report showed inventories posted a record draw of 17 million barrels," said Oanda.
However, looking ahead, Oanda believes the strong dollar will likely weigh on oil prices, but "that should only lead to limited downside given how good both the supply and demand fundamentals have become."
The Energy Information Administration on Wednesday reported that U.S. crude inventories dropped by more than 17 million barrels in the week ended July 28. Gasoline inventories, however, rose by nearly 1.5 million barrels, while distillate stocks fell by 800,000 barrels.
A downgrade of the U.S. credit rating to AA+ from AAA by Fitch Ratings was seen as a negative for overall market sentiment.
Metals:
Gold lost ground, extending overnight declines.
In focus was a rise in Treasury yields and a stronger dollar following the U.S. credit downgrade by Fitch, as well as better-than-expected jobs data.
Gold "often trades as the anti-fiat instrument, inversely tracking a combination of the U.S. dollar and Treasury yields," Daily FX said.
The outlook for the precious metal seems bearish, as retail traders have responded by becoming more bullish, he said, pointing to the IG Client Sentiment gauge, a contrarian indicator. "This is a warning sign that further losses may be ahead."
"The gold market is going to struggle as long as re-steepening of the U.S. curve continues. The VIX is rising and it seems Wall Street is getting nervous here," said Oanda.
---
Iron-ore futures were lower amid risk-off sentiment in broader markets and China's plans to cap steel output.
Iron ore's recent rally has likely petered out as moves to aid the property market look unlikely to boost demand, ANZ said.
Rio Tinto CEO Jakob Stausholm warned that Chinese steel production has reached saturation point, ANZ added.
TODAY'S TOP HEADLINES
China Caixin Services PMI Strengthened in July
A private gauge of China's services activity edged up in July, pointing to continued recovery in the nation's services sector.
The Caixin services purchasing managers index climbed to 54.1 in July from June's five-month low of 53.9, Caixin Media Co. and S&P Global said Thursday.
BofA Dumps Its Recession Call. Why Economists Are Getting More Upbeat.
Economists at Bank of America became the first group at a major bank to back away from a forecast that a recession is on the way. Others may follow, possibly swiftly.
BofA's (ticker: BAC) Michael Gapen and his team said in a research note on Wednesday that given recent economic data, they now anticipate a "soft landing" for the economy rather than the recession they had expected to hit in the first half of next year. That is another way of saying they expect economic growth to slow down, rather than going into reverse.
The Bank of England Will Likely Follow the Fed. But Its Work Is Far From Done.
The Bank of England is set to match moves from fellow central banks with a quarter-point interest-rate hike this week, but its work in taming inflation remains far from finished-and investors should still brace for a hawkish surprise.
While the Federal Reserve and European Central Bank raised rates by 25 basis points last week both of those central banks have signaled that their work is nearly done and will be data-dependent. That amount is also the consensus for the Bank of England's move on Thursday.
Iran Begins Two-Day Shutdown as Heat Wave Worsens
TEHRAN-Neighborhoods across Tehran fell quiet Wednesday as temperatures surpassing 100 degrees Fahrenheit bore down on Iran's capital.
Many residents stayed home after the government declared an emergency two-day shutdown, closing banks, exchange shops and government offices and calling on private businesses to follow suit. Toward the north, roads leading out of the city to cooler regions were clogged with people seeking relief from the heat.
State Department Orders Partial Evacuation of U.S. Embassy in Niger
WASHINGTON-The State Department ordered Wednesday the departure of nonemergency U.S. government employees and eligible family members from Niger over concerns that tensions could escalate after the military junta detained the country's elected president last week.
The State Department updated its advisory, which had previously warned American citizens to reconsider travel to Niger because of crime, terrorism and kidnapping. It is unclear how many Americans are living in Niger, and the State Department said it is working to assess what can be done to ensure all Americans are safe.
Meta's Ray-Ban Smart Glasses Fail to Catch On
The Ray-Ban smart glasses launched by Meta Platforms almost two years ago have struggled to catch on with owners, many of whom appear to be using the devices infrequently, according to internal company data.
Less than 10% of the Ray-Ban Stories purchased since the product's launch in September 2021 are used actively by purchasers, according to a company document from February reviewed by The Wall Street Journal. Meta sold a total of 300,000 of the wearable devices through February, but the company only had about 27,000 monthly active users.
Write to singaporeeditors@dowjones.com
Expected Major Events for Thursday
00:01/IRL: Jul Ireland Services PMI
06:00/GER: Jun Foreign Trade
06:00/NOR: Jun Credit Indicator C2
06:30/SWI: Jul CPI
07:00/TUR: Jul PPI
07:00/TUR: Jul CPI
07:15/SPN: Jul Spain Services PMI
07:30/EU: Jul EuroCOIN indicator of euro area economic activity
07:45/ITA: Jul Italy Services PMI
07:50/FRA: Jul France Services PMI
07:55/GER: Jul Germany Services PMI
08:00/ITA: Jun Retail Sales
08:00/EU: Jul Eurozone Services PMI
08:30/UK: Jul S&P Global / CIPS UK Services PMI
(MORE TO FOLLOW) Dow Jones Newswires
08-03-23 0018ET
